CTC is the abbreviation used for the term ‘Cost to Company’. Every employee has come across the term CTC whenever they have negotiated for a job offer. It is also a common term used by HRs when referring to the salary of an employee. However, why do they refer to salary as CTC instead of simply ‘salary’?
Let us understand the concept of ‘CTC meaning’ and how it is different from salary.
What is CTC (Cost to Company)?
Cost to Company (CTC) ensures the total salary package of the employee. All monthly components such as basic pay, reimbursements, and various allowances are included in the CTC.
Additionally, all annual components such as gratuity, annual variable pay, annual bonus, etc are found in the Cost of the Company.
It is basically the total cost that a company pays for an employee, including their salary, benefits, bonuses, and any other expenses related to their employment.
▸Frequently asked questions (FAQs)
1. What are the components of Cost To Company (CTC)?
The ‘Cost to Company’ calculation typically includes the following components:
▸ Basic Salary
It is a fixed amount that forms the foundation of an employee’s salary.
▸ Dearness Allowance (DA)
DA is a cost of living adjustment allowance provided to employees to cope with inflation. It is calculated as a percentage of the basic salary.
▸ House Rent Allowance (HRA)
If an employee is not provided with company accommodation, they may receive an allowance to cover rental expenses. The HRA component is typically a percentage of the basic salary.
▸ Conveyance Allowance
This allowance covers transportation expenses incurred by the employee for commuting to and from work.
▸ Medical Allowance
It includes expenses related to medical insurance or reimbursement of medical bills.
▸ Performance Bonuses
Many companies offer variable pay components based on an employee’s performance, such as annual bonuses or sales commissions.
▸ Employee Provident Fund (EPF)
Employers contribute a percentage of the employee’s basic salary towards EPF, a government-mandated retirement savings scheme.
Employees’ State Insurance Scheme of India is a social security scheme planned for employees for providing socio-economic protection to employees in organized sectors.
It is a lump sum amount paid by the employer to the employee as a token of appreciation for their long-term service.
When employees are employed for more than five years, they become applicable for the gratuity amount, which is typically calculated based on the employee’s tenure with the company.
So we can say that, Cost to Company (CTC) = Gross Salary + Direct Benefits(PF, Gratuity) + Indirect Benefits + Savings Contributions + Deduction
2. What is the difference between Gross Salary and Cost to Company (CTC)?
▸ Gross Salary
Gross salary is part of the CTC that refers to the total salary earned by an employee before any deductions are made.
It includes the basic salary and all other components such as allowances, incentives, bonuses, and overtime pay.
Let’s take an example. If an employee has a gross salary of $60,000 per year, it means they will receive $5,000 per month before any deductions.
▸ CTC (Cost to Company)
CTC represents the total cost a company spends to employ an employee.
It is the sum of all the expenses associated with the employee, including the gross salary and various other components like the provident fund (PF), medical benefits, insurance, gratuity, and other statutory benefits.
3. What is the distinction between CTC, Gross Salary, and Net Salary?
All of these terms such as CTC, direct benefits, indirect benefits, net salary, gross salary, etc. are bound to create confusion. Since we have already discussed the different terms related to CTC, one should also discuss the difference between CTC and gross salary, take-home salary, etc.
- Gross salary: Gross salary is basically the sum of basic salary and other allowances.
- Net Salary: It can also be said to be the sum of the net amount paid by the employer and the deductions.
- Cost to Company (CTC): It is the overall monetary and non-monetary amount spent by the company on an employee and hence, it’s the sum of in-hand salary as well as all other benefits, savings contributions, and deductions.
4. What are the CTC Benefits in India?
‘Cost to Company’ provides transparency and clarity in every detail on various components of the salary. It helps the candidates understand components and other associated costs borne by the company.
Along with ensuring all the detailed components, it helps employees have a holistic view of their overall compensation, including both fixed and variable components.
‘Cost to Company’ helps employees plan their taxes effectively. Employees get a clarified understanding of taxable and non-taxable portions in optimizing tax liabilities.
CTC incorporates benefits like health insurance, provident fund contributions, gratuity, and other allowances that ensure the financial security and well-being of employees.
CTC flexibles the entire salary structure. This flexibility allows organizations to design compensation packages that align with their talent acquisition and retention strategies.
5. How is Cost to Company (CTC) calculated in salary?
▸ CTC = Gross Salary + Direct Benefits(PF, Gratuity) + Indirect Benefits + Savings Contributions + Deduction
6. Other Related Terms with CTC
▸ Takehome Salary
The terms ‘Take-home Salary’ or ‘Net Salary’ or ‘In-hand Salary’ all refer to the same concept: It is the amount of cash provided to the employee at the end of each pay cycle for their usage after all statutory deductions are completed.
Since the take-home pay or net salary is the final amount that the employee receives, it’s the usable money that they can utilize for their expenses.
Hence, understanding the bifurcation of the ‘Cost to Company’ (CTC) is also important while negotiating an offer during the recruitment process.
▸ Direct Benefits
These are the benefits that are provided to the employee directly, with the salary. Some of the most common examples of direct benefits include house rent allowance (HRA), medical allowance, dearness allowance (DA), leave travel allowance, phone bill allowance, incentives, commissions, bonuses, etc.
▸ Indirect Benefits
These are the perks that benefit the employee indirectly. Some of the most common ones include zero-interest loans, meal coupons like Sodexo, accommodation, life insurance and health insurance premiums, IT savings, etc.
▸ Savings Contributions
The ‘Savings Contributions’ refer to the multiple perks offered as savings for the employee such as Employee Provident Fund (EPF), Public Provident Fund (PPF), gratuity, etc.
The ‘Deductions’ refer to the statutory deductions which are mandated by the government. In India, income tax is levied on salaried employees who earn over ₹2.5 lakh per annum.
The percentage of income tax levied is dependent on the slabs set by the government from time to time and other deductions and the take-home pay is affected due to these changes.
▸ Tax deduction
The tax deductions are governed by the Income Tax Act, of 1961, and the rules and regulations prescribed by the Central Board of Direct Taxes (CBDT).
In the standard deduction, if the salary of the individuals is on and above the fixed amount of Rs. 50,000 is allowed for taxable individuals. This deduction is subtracted from the gross salary to arrive at the taxable income.
Besides the standard deduction, the Professional tax is a tax levied by some state governments on salaried individuals. Though the fixed amount is Rs. 2500, still the amount varies from state to state, and it is deducted from the gross salary before calculating the taxable income.